Name: Pinterest (NASDAQ: PINS)
Website: https://pinterest.com
Wiki: https://en.wikipedia.org/wiki/Pinterest
Financials: https://investor.pinterestinc.com/investor-overview/default.aspx
Introduction
I am back with another stock analysis and this time I will also be doing a much more thorough analysis with the analysis of things such as mission statements. I think that they are important and will help improve the analysis.
Moreover, I am thinking of changing my main medium of analysis to a youtube channel. However, I would still be blogging and I am not entirely sure on using youtube as well.
Pinterest is a company that Wall Street has pretty much crushed over the last few months, dropping from its all-time high of $89.90 to a petty $29.45 currently (a roughly 65+% drawdown). I have bought shares when it was at $64 and I believe it is a very interesting company. But, has my thesis busted?
Qualitative Outlooks
Business Overview and Model: Pinterest is a platform that allows users and businesses to create Pins. Pins help brands generate awareness, improve engagement, or to promote their company and products. However, the platform is completely free for consumers to use and it earns money from Advertising.
Brands can specify the payment for visibility, engagement, clicks, impressions and other methods to reach to customers according to their objective.
Pinterest’s aim is to attract consumers to use it so that it causes more advertisers to use their platform, allowing them to reinvest extra capital from more ads for customers. This results in a network effect, which is very common in social media based platforms.
Mission Statement: I have added this to improve my analysis as I have read Built to Last (book review coming soon), which looks at visionary companies throughout its history and figures out what differentiates them from other companies in the same industry.
And, what stood out was their devotion towards their mission.
Pinterest’s mission is “bring everyone the inspiration to create the life they love“. The mission is very clear and inspiring – as an employee, one would probably find it moving. More importantly, they are very driven by their mission as a company – last to last quarter, they banned ads related to weight loss to prevent body shaming (one of the only platforms to do so).
Products and Markets: Pinterest is the world’s third largest social media platform where most users come to get inspiration. In total, Pinterest has 444 million monthly active users with 89 million from the United States and 356 million globally (outside the US).
Eventhough, MAUs have slid from 478 million (2 quarters ago) to 444 million now, YoY customer growth has increased slightly at 1%, which is pretty good considering covid user inflation/deflation.
On top of that, the majority of Pinterest users come from the below 25 range with Gen-Z and Millennials occupying the vast majority of sales. This allows Pinterest to drive consistent growth from the younger generation (thus boosting future potential).
Pinterest’s ARPU (avg. revenue per user) is roughly at $1.41 internationally and $5.55 in the United States. Their ARPU is almost 30 less than Facebook, which allows them to have tremendous room for growth. If they were to just increase international ARPU to levels in America, there revenue could increase by 4X. There is definitely a huge upside in their ARPU.
Fortunately, ARPU has been increasing by 37% YoY and increasing consistently.
Customers and Competitiors: Pinterest is further increasing its moat and growth potential with aggressive investments to bring in more people. WooCommerc and Shopify have partnered and integrated with Pinterest. Shopify’s addition will play a important role in the overall customer retention and increase in the future.
Moreover, Pinterest has released and majorly invested in “idea pins” which are short-form videos that would help drive engagement between users and advertisers. Tools for advertisers have also been added to ensure successful integration in advertisements.
In fact, AR and VR capabilities have been enhanced as well, which would significantly help Pinterest in the long term.
Upon more research, Pinterest seems to be really popular with younger audiences, especially women. Pinterest has gained an upper hand in inspiring people – which has drove lots of good reviews for it.
For example, if we wanted to connect with people, we would likely use Instagram, Facebook, or Twitter. But, if we wanted to find ideas for home-deco or photography, we likely turn to or get directed to Pinterest.
Overtime, Pinterest has grown into building connections between people as well. Pinterest has clearly identified itself as different from other social media platforms and its unique positioning almost prevents any other platform from directly competing with their business model.
Next, if competitors were to launch a similar platform, they would not be able to compete with the advantage of contracts that Pinterest holds and their brand name. If big players in this space try to enter the market, Pinterest can rely on its 1.5 million advertisers.
And, their brand of “helping get ideas” is huge. I mean, pretty much all of us have heard about Pinterest and the company is only 29 billion in mkt cap. If we were to compare it to SnapChat (90 billion) or even a tenth of Facebook (96 billion), we can already see the huge difference.
Moat: While I have not really separated this section in my other blogs, I think I will start doing so now so that the differentiation in clearer. I think that Pinterest has 3 crucial parts to its moat – Network Effect, Low Cost Advantage and its Brand.
Pinterest benefits from a network effect, which means that as the company get more users, its will get more advertisers and data – leading to more users. Furthermore, if your close friends use Pinterest, you are more likely to us it too (though not as strong as FB or Insta).
Next, they also benefit from lower costs for advertisers. This is due to the fact that advertisers are more likely to use Pinterest as its has the advantage of data and as more data comes in and grows, it can offer its services at a lower cost to advertisers. Hence, more advertisers can access their data as an alternative.
Last, Pinterest has a strong brand. It has in the last few years, grown to become a very popular website with more than 11 million visitors every day. Internet searches and trends also showing its popularity in the US and in developing countries worldwide.
Optionality: The company has a lot of opportunity in moving into and dominating other nearby sectors. Firstly, they now have story pins, idea pins, and videos on their service.
They have also got lots of room to increase international revenue. In fact, their international ARPU is only $0.38. With increasing global presence, they could earn massively by just increasing their customer spenditure by 10-20%.
Pinterest is increasingly becoming a platform where users can shop and advertisers can sell due to their deal with Shopify. In the future, I can see them diversifying from social media to e-commerce or subscription based services too.
Management: I think that Pinterest’s management is extremely powerful and worthy. In fact, both of the co-founders are still involved and they have a passion for what they do. The board of directors take part in activities that unleash creativity or help in the arts. Many of them have been awarded for their design skills as well. Along with their business knowledge, Evan Sharp and Ben Silbermann, are both Bachelors of the Arts as well.
Management has also met and exceeded their expectations and promises. I really think they have a great roadmap laid ahead for Pinterest.
Glassdoor ratings are high at 86% approval of CEO and 4.1 rating as a place to work at.
Shareholders: Insider Ownership in Pinterest is above 10% too, which is a healthy sign for a company growing at its rate. Below are the list of shareholders…
7.61% – T. Rowe Price Group
6.2% – The Vanguard Group
6.18% – Benjamin Silbermann
5.89% – Paul Sciarra
Bear Case: Pinterest’s bear case is that it might have already peaked – the MAUs at 478 million and the revenue per user. Covid may have fuelled their growth and they might not be able to retain customers after offices and schools open. However, I don’t think this is the case as while customers can’t keep sliding, they were quite popular and had more customers (in the US) before the pandemic.
Another reason for being bear is that if companies like Facebook try to target their sector, they might be in trouble. Nevertheless, currently it seems that Facebook’s entrance into the metaverse should not pose a threat to them.
Quantitative Lookouts
Revenue Growth: Revenue has grown 44% YoY from 1.62 billion to 2.44 billion. Through the last few years, revenue has been growing consistently at this rate I still think it has room to drastically increase revenue.
Cash and Cash Equivalents: Pinterest has total cash and cash equivalents worth of $1.23 billion and with no long term debt, it accounts to about $1.89 in net cash per share (650 million shares outstanding). Therefore, it results in about 6.42% of its current share price.
Importantly, their cash and cash equivalents are rising steadily at a quick rate.
Debt-to-equity Ratio: Pinterest has no debt and with $2.70 billion in equity, their debt-equity ratio stands clean at 100% equity, 0% debt.
ROE: Pinterest’s ROE is 15.6%, which is considerably higher than -7% of its industry. ROE has also been rising with net income turning positive.
Current Ratio: Pinterest has $2.36 billion in current assets and only $204 million in current liabilities. That leaves us with a current ratio of 11.7.
While that generally means too high, the industry average is around 8 as well. I also feel that the management is handling their assets well.
Intrinsic Value: Pinterest has $633 million in free cash flow this year. With 650 million shares outstanding, we are left with $0.97 in free cash flow per share. Therefore, its free cash flow per share is at 30X its actual stock price. Hence, if for 10 years, Pinterest were to grow at 25% YoY, its sell off value would be between $45 – $50, with a 10% discount. This means that currently Pinterest is trading below its intrinsic value. However, for a more conservative approach, we can take about 15-20%.
Risk-Reward Ratio: Next, let’s calculate Pinterest’s risk-reward ratio. If Pinterest were to fall to a maximum of $25, with a intrinsic value of $45, the risk reward ratio is 2.88:1.
Kelly Formula:
Let us once again check the betting with the Kelly Formula.
Odds of a 200% or more return in 3 years – 93%
Odds of Breakeven – 2%
Odds of up to 15% loss in 3 years – 3%
Odds of total loss in investment – 2%
Let’s use the Kelly Formula – ($3*0.93 + $0.0*0.02 + -$0.15*0.03 + -$1*0.02)/($3*0.95) which is about 97%. A nice kelly formula result.
Summary
I think that the upside outweighs the downside in Pinterest a lot. However, I will be keeping an eye on its quarters to see its MAUs and ARPUs.
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